From supply chain chaos to labor shortages, inflation and tariffs, the construction industry has more than its share of economic challenges to defend against.
And while there is never a bad time to button down your processes and scrutinize your numbers for profitability gaps, you’d be hard-pressed to find a better time than periods of economic uncertainty.
The good news is that there are many ways to insulate your business against higher costs. Here are eight good ways to buffer your business.
Improve Your Estimates & Timely Financial Reporting
Generating precise estimates and tracking project expenses in real time are key to staying within budget. Make sure estimated costs reflect inflation, wage increases, and other factors.
Leverage reliable software tools and your company’s historical data to create feasible project budgets and forecast costs. Use the latest job cost accounting and reporting methods to identify cost increases before they become a liability.
Regularly compare estimated costs to actual costs and review the profitability of all jobs at least monthly. Include both direct and indirect cost allocations and, as appropriate, use the percentage of completion accounting method to recognize revenue. Partnering with a CPA firm for accounting and outsourced controller services can provide you with a reliable source of support and expertise.
Create a Contingency Reserve in Project Budgets
Setting aside a portion of the job budget for unforeseen expenses can cushion the blow of surprise cost increases or project delays. Don’t overlook risk management. Identify and assess potential threats early and create a plan to mitigate them.
Incorporate Flexibility into Contracts
Consider price-acceleration clauses or cost-plus contracts that allow you to adjust the contract price and pass unexpected costs on to the owner. When negotiating a contract, consider asking for a deposit to buy and store materials before construction starts.
In addition, clearly specify change order terms and procedures in the contract. Don’t wait until a job ends to pursue additional compensation. Process change orders immediately so you can get approval and bill for added costs as soon as possible. Timely cost allocation and revenue recognition, along with supporting documentation, will make it easier to make a claim under a price-acceleration clause or defend against a customer’s refusal to pay.
Make Sure You’re Getting the Best Deal
Let suppliers know you’re comparison shopping to encourage them to offer the best deal possible. Take advantage of bulk purchasing or just-in-time delivery options when you can to reduce material costs and minimize the risk of price fluctuations. Unless you receive a steep discount for payment in full, use manageable financing for your purchases. Although you’ll likely incur interest charges, spreading out payments should help free up cash flow.
Create Profitability Incentives for Project Managers
Whether through compensation or bonuses, give project managers a stake in meeting profitability goals. Tracking labor hours, staying on schedule, double-checking material shipments, and ensuring subcontractors arrive on time and fully prepared are effective tools project managers can use to control costs. Project managers should also review job-specific financial reports and be empowered to adjust as needed. Put controls in place to minimize the risk of project managers taking unwanted shortcuts, such as shifting costs from one job to another.
Improve Your Billing & Collection Processes
Draft contracts that include:
- When payments are due,
- How payments should be submitted
- Specific penalties triggered by late payments.
Ensure invoices are detailed and include supporting documentation showing proof of work. Follow the invoice schedule diligently and follow up on unpaid invoices promptly.
Utilize accounts receivable software to ensure that invoices are accurate and timely. Set up automated reminders with due dates, and don’t hesitate to follow up on past-due invoices.
Take Advantage of Available Tax Credits
Contractors often overlook tax credits in the bustle of winning and completing jobs, but it’s an expensive oversight: tax credits lower your tax liability dollar for dollar, freeing up money that can be used to cover costs or build a cash reserve.
Level-Up Your Accounting Support
A CPA firm experienced in construction accounting is an investment in the long-term success of your business. The right CPA partner will help ensure that you are up to the task of carefully managing your costs while also ensuring that you have the reliable accounting, financial and business advisory services you need for better decision-making.
Disclaimer: The information provided in this article is for general informational and educational purposes only. It does not constitute professional financial, accounting, legal, or construction business advice. Economic conditions, tax regulations, and contract laws vary by jurisdiction and change over time. Readers should consult qualified CPAs, construction attorneys, and business advisors before implementing strategies. The mention of specific services or approaches is illustrative and does not imply endorsement. The author and publisher disclaim all liability for any financial losses, compliance issues, or operational outcomes arising from reliance on this content. Always review your specific business circumstances and seek professional guidance tailored to your needs. This article does not guarantee specific financial results or cost savings.
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